The mood about the US economy feels very different right now than it did a year ago. At the start of 2023, almost everyone seemed to be predicting recession. Right now, there is a high degree of optimism about the prospects of a soft landing. On this special episode of Odd Lots, we speak with Lael Brainard, the director of the White House’s National Economic Council. We talk about the state of the recovery, why public frustration towards the economy remains high, and what further can be done by the Biden administration to address the high cost of living. This transcript has been lightly edited for clarity.
Key insights from the pod:
Discussion of labor market — 3:38
Quality of jobs available — 4:32
Why has the labor market held up even as interest rates rose? — 6:27
Why are consumers unconvinced by the economic recovery? — 9:37
Inflation and gas prices — 12:34
Corporate price-gouging — 14:56
Domestic oil production — 19:37
Improving housing affordability — 20:50
Infrastructure spending and red tape — 24:44
Is this a soft landing? — 26:08
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Joe: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy: (00:15)
And I'm Tracy Alloway.
Joe: (00:17)
Tracy, new year. I think so far in 2024, I do not feel any more clear or confident that I have some real deep sense of which way this economy is going.
Tracy: (00:29)
It feels like there's a risk that everyone could be wrong just going in the other direction this time around. So, as we've discussed multiple times at this point, it feels like there's a lot more acceptance for the idea of a soft landing or the idea that inflation can come down without generating a big spike in unemployment.
Joe: (00:47)
No, there's no question. At the end of last year, soft landing optimism really picked up. But you could tell me a new story right now, and I would believe it. You could say ‘Oh, financial conditions are easing quite a bit. The stock market's at an all-time high, or close to an all-time high. Rates are falling. The labor market is tight. Wage growth just came in higher than expectations. There's still upward risk of inflation.
You could tell me ‘Oh, U6 and various measures of the labor market actually weakened last month, maybe the economy is not as on solid footing as we thought or two months ago.’ Like’ any story you told me, I might believe you.
Tracy: (01:27)
This is a symptom of being online too much . And talking to people online too much all day. That's it. And just being able to argue both sides of the story because you see it constantly. But I mean, I take the point.
There is a lot more optimism out there right now than there was a year ago. But on the other hand, there is still this, I guess, lingering sense of unease or even angst that you see in some of the consumer measurements. Or again, to your point online, if you point out the jobs market is doing really great, you will have a bunch of people talking about revisions to payrolls and things like that.
Joe: (02:02)
Yeah. And it's legitimate, some of the measures have gone down. So I really, you know, I genuinely, I find myself, and plus the crowd is, you know, [it] gets it wrong a lot. So it seems like we're tempting fate by believing too much in the soft landing story.
But it really does feel to me, you know, there are many moving parts to this economy. You mentioned some of the sentiment measures, but there's also the fact that even with the inflation improvement housing is still incredibly expensive and there's all kinds of frustrations around that. So I don't think we will ever reach the end where we could say ‘Okay, we know what's going on in the economy right now. We're always just going to sort of be searching for more threads to follow.’
Tracy: (02:41)
The soft landing is a journey, not a destination, Joe.
Joe: (02:45)
Well, on that note, I really think we do have the perfect guest to start the year to discuss the state of the economy, where it's going, what policy levers might yet be pulled as we go through 2024. I'm thrilled to welcome her first time coming on to the Odd Lots podcast.
Lael Brainard, Director of the National Economic Council. Lael Brainard, thank you so much for coming on Odd Lots. Really appreciate you joining us. Why don't we just get started.
So on Friday we had the latest December non-farm payrolls report. Headline looked pretty solid, unemployment, wages, job creation, better than expected. But we did see some weakening in measures like labor force participation rate, prime age employment to population, U6 measures of underemployment. Is there anything that concerns you right now about the momentum of the labor market as we head into 2024?
Lael Brainard: (03:38)
Well, I have to say, taking a step back, that the labor market looks really strong. If you think about it, it started 2023 with unemployment already below 4% and it maintained that. In fact, it's been below 4% now for just about two years, which I think is, we haven't seen that for 50 years.
And even despite the fact that we started the year from a position of low unemployment, the economy created an additional 2.7 million jobs, which is really a record. And in terms of thinking about the economy going forward, the growth of the economy's been quite good. Productivity has been up, and inflation has actually come down during this time of strong employment growth. So that also looks like a pretty healthy economy.
Tracy: (04:32)
So I take the point about the health of the jobs market at the moment, but I can tell you from personal experience that if you tweet the payrolls figure came in strong or higher than expected, you do get a bunch of people on the internet who are pointing to things like downward revisions or the shift from full-time to part-time jobs, or the number of people now who have to hold multiple jobs. How are you thinking about, I guess, the quality of jobs as well as the headline figure?
Lael: (05:04)
Look, I think the overall statistics are very strong in terms of the quality of jobs as well. We've had wage growth that is exceeding inflation now, not just relative to when the president took office, but also relative to the strongest pre-pandemic year.
So wages are up by an amount that means most households can spend, you know, $3,500 of extra spending after buying the same things they would have purchased pre-pandemic. Wealth is also up and the fact that so many Americans are employed that the employment to population ratio for working age Americans is very high, higher than pre-pandemic means that those people are going to continue earning and continue being able to spend and to power the economy going forward.
So while I think we are seeing slowing growth, which would make sense at this point in a very strong recovery, nonetheless the wages, the record union contracts that we have seen over the last year, bode really well for the ability of households to continue spending and to continue fueling the economy.
Joe: (06:27)
Do you have an explanation for why the labor market has held up as well as it has given a sort of historic interest rate shock over the last 18, 24 months?
Lael: (06:38)
Well, look, I think it is remarkable actually just how much this president has navigated through. If you think about it, the pandemic, which scrambled supply chains and led to a historic number of people out of the labor force. And then just on top of that, we got this massive oil price shock by Russians in invasion of Ukraine. And just a year ago, don't forget, we navigated a regional banking crisis all while interest rates were rising.
But if you look at the strength of the labor market, the growth that we've seen over the course of the last year, well above trend, and if you look at inflation, which we saw coming back down to 2% in terms of that core measure over the last six months, it's been a strong record. And I think it reflects the president's own views that this was not a normal kind of recovery.
And he focused on two things. One, on making sure that as many Americans were able to stay in their homes, come back into the labor force quickly, maintain their household balance sheets, so you had a much more equitable recovery. And it was also a much stronger recovery that attracted a lot of Americans back into the labor force. So instead of seeing the Great Resignation, we've seen the great rebound in terms of the workforce.
And then the second thing, he put a tremendous amount of focus on the supply side of the economy, which was really the source of a lot of the distortions. And he's got an agenda of investing in America and investing in Americans that has an ongoing focus on more R&D spending, more spending on clean energy transition, fixing infrastructure that really needed to be fixed, and of course investing in industries of the future like semiconductors.
So, you know, we've got that strong investing in America agenda along with a strong recovery, attracting people back into the labor force, into these good jobs of the future.
Tracy: (08:58)
So Joe and I definitely want to get into more of the supply side in just a bit, but before we do, given everything that you just laid out -- so the economic recovery, which was stronger than a lot of people expected, the still very strong and buoyant jobs market, the improvement in wages where, you know, on an inflation-adjusted basis, we have seen those going up. Why do you think in surveys, people are still showing some sort of angst? You know, we've seen this repeatedly and you can call it whatever you want, the Vibecession or something else, but why aren't those messages filtering through?
Lael: (09:37)
Yeah, so it's a good question. I mean, if you do look at both household incomes adjusted for inflation, really strong improvement since before the pandemic. And secondly, if you look at wealth, median household wealth is up by 37%, inflation-adjusted, since before the pandemic. So the best year of the previous administration.
So in terms of personal finances, you do actually see Americans reporting with a large majority that they are doing okay financially, and job satisfaction is quite high. But it's been a very stressful few years for Americans. If you think about the number of layoffs, the number of small businesses that shuttered, and then the surge of inflation that was on the supply side.
And it may take a little bit of time for Americans to really feel confident that the good economic numbers that they're seeing in their own good personal situations is actually going to be sustained.
And part of that is some prices have not come down and we're fighting pretty hard to get those prices to come down. And one area that really is difficult for Americans is healthcare affordability. And so you've had a huge set of really important initiatives that the president has been focused on. For instance, in the legislation that was passed about a year ago, it actually brings down the cost of insulin for the first time from $400 a month to $35 a month for seniors.
And some companies have extended that more broadly and it caps the yearly out-of-pocket costs for seniors for prescription drugs at $2,000. So that will start to make a dent there. But we're going to continue pushing on healthcare costs as well as other areas which are really more about deceptive pricing, where Americans feel like they're just spending more than they should.
Joe: (12:04)
So one area of disinflation or supply side improvement that's very clear has been on oil and gasoline prices. And you mentioned the oil shock a couple years ago, or a year and a half ago, but it's obviously come down quite a bit. Meanwhile, US oil production, domestic production of oil is at all-time highs.
Is that something that the White House is proud of and is that something that further aims, does the White House aim to see further expansion of domestic oil production in order to push gasoline prices lower?
Lael: (12:34)
Well, gas prices are so important for weekly budgets and the kind of kitchen table economics focus of this administration is very much trying to make sure that people have a little breathing room at the end of each month after paying their bills.
So that reduction in gas prices at the pump from to about two -- I want to say it's just a touch below $3 -- median price that Americans are seeing around the country. And in a lot of states they're seeing lower prices than that. That is a very meaningful amount of relief. It's about a $1.90 down from what we saw a year ago.
And of course we're also seeing some grocery store prices coming down. But in terms of your question, the president also has a huge clean energy transition investment agenda. He got historic legislation there. We have tax credits that are leading to a real boom in manufacturing of clean energy, clean vehicles.
So these two things are going on at the same time and that bodes very well for the longer-term transition to a clean energy future that America is in the process of making. And I would say those tax credits, [there’s] tremendous excitement there, huge numbers of private sector investments that are being catalyzed by those government Inflation Reduction Act/clean energy incentives.
Tracy: (14:13)
Since you mentioned grocery prices, one thing we've been talking quite a bit on this podcast about is excuseflation, or the idea that companies have taken advantage of supply chain disruptions to raise their prices all at once. And other people call it different things, you know, profit-led inflation or sellers’ inflation. Biden recently referred to it as ‘price gouging,’ but I'm curious what evidence you see, from your perch, of companies sort of opportunistically raising prices. And then secondly, what tools does the Biden administration actually have to target prices that are ultimately being set by private enterprises?
Lael: (14:56)
Yeah, so we have seen, and you can see it in the data, that when supply chains were snarled and input prices were going up, that a lot of big corporations raised their prices to consumers by as much or more, which meant that their markups went up, which some people have referred to as a price-price spiral.
And the president has been very focused on this because if you look at supply chain measures, they look like a very sharp spike upward to a level of supply chain disruptions that we really don't see in the data prior to 2022. And then they come down extremely sharply over the course of 2023, so that they are now back down to levels that we saw pre-pandemic and input costs also have come down.
So what is really troubling is that corporations need to pass those input cost declines on to consumers and so that consumers can see the benefit of that in their weekly budgets.
And the president has been very clear about how important that is. We've done a lot of work to fix those supply chains, now corporations need to make those input cost reductions available to consumers in terms of their final price.
And we're also taking action where we have enforcement tools on deceptive or unfair pricing. And so you've seen actions in areas like airlines on family seating fees or extra baggage fees. We've seen actions that the administration has taken on overdraft fees and bounced check fees. And we'll continue to push really hard and take action where necessary in areas like ticketing fees, other areas where American consumers are just kind of fed up with seeing these extra charges.
Tracy: (17:16)
How do you encourage companies to pass on those price declines to consumers? Because I'm just thinking, in other parts of the world, notably Europe, there's been talk of stuff like, or some action, on price controls. But that seems like a sort of political non-starter in the US. So what exactly can you ask companies to do on this front?
Lael: (17:39)
Yeah, that really hasn't been the approach that this administration has taken at all. It has been to use the authorities we have at our regulatory agencies to go after fees that are deceptive, fees that are not transparent, fees on ticketing or fees on hotels.
You know we've had the president meet with people who -- for instance, Becky Chong from Oregon, you know, came to a junk fees event at the White House. And she talked about how she and her husband took her two daughters to see their grandparents last summer. And they were surprised to see unexpected junk fees on their hotel bill that totaled over a hundred dollars.
So partly by just making these practices very transparent and then taking enforcement actions and creating rules about transparency of those prices, we are starting to see some real progress, but it's not enough. And in the area of healthcare in particular, we have legislative tools to enable drug prices for the first time to be negotiated with Medicare, and we expect that to make a big difference.
Joe: (18:59)
I just want to go back again to the question of domestic energy, especially given the industrial policy efforts from the White House. Chips, the Inflation Reduction Act, the infrastructure spending, obviously is going to need a lot of energy to power new factories, new facilities and so forth.
Does the White House want to see that domestic production of oil and gas continue to rise? I take it about the clean energy and the transition, but in terms of fossil fuels, does the White House want to see that line continue to rise? I feel like the last president and the perhaps rival would be tweeting about that line a lot.
Lael: (19:37)
The president has passed historic legislation to help this economy transition in the most resilient and dynamic way to a clean energy future. So that really has been a huge focus on his part to make sure that the US is a leader on technologies that are going to reduce emissions and a leader on clean energy and electric vehicle investments.
At the same time during this transitional period, he's been very focused on making sure that American consumers have the ability to have a little extra money at the end of the month. And that has meant working really hard to get what were very distorted high prices at the pump down very substantially.
And that's what we're seeing. We're seeing gas prices at the pump below $3 in most parts of America. So those two things are both important to the president, and I think we are seeing real progress on both.
Tracy: (20:50)
So in terms of things that Americans really care about, I mean, one of those has to be housing. And we have seen various metrics of housing affordability really decline in the past couple of years. And there is a broader concern that with interest rates still relatively high, that you are going to start to see capacity slow. And there is I guess this tension between keeping rates high to bring down inflation and also encouraging more supply of housing so that ultimately it can be more affordable. What can the administration do when it comes to that particular tension?
Lael: (21:29)
Yeah, so you're exactly right. Making housing more affordable is central to so many Americans, whether they be first time aspirational home buyers or whether that is people who are renting. Bringing down the costs of housing for Americans is really important.
Now the good news is we have actually seen mortgage rates come down by about one and a half percentage point just in the last few months on the back of the really good inflation data that we've been seeing. So that's very encouraging.
But the president also has a very forward-leaning agenda there to ensure that there are many more affordable units. We have been supporting tax credits that would lead to about 1.2 million additional affordable homes and a second tax credit that would mean about 500,000 more affordable homes for first time home buyers. The president has proposed relief for first generation home buyers and renters to help lower costs.
And I think we really are going to be pushing hard on Congress to get those policies done. Congress, the Republican House in particular, has not supported a lot of improvements on affordable housing, but we're going to continue working really hard.
And additionally, we're trying to incentivize changes in local zoning policies in a lot of cases near transit hubs by providing incentives with transit dollars, we're getting localities to unlock areas for more dense housing, and we think that'll make a really big difference over time as well.
And the final thing I'd just say is that with office vacancy rates being a bit higher in some downtown areas, we've also got some programs to encourage office to residential conversions in downtown areas.
Joe: (24:01)
You mentioned zoning, particularly the constraints around housing near transit, sort of something that I've been thinking about, or lot of people are talking about, you know, there was a CNN report that the White House was frustrated by the lack of tangible things the president can point to on the campaign trail that said, you know, ‘We built this,’ or that clear evidence of these bills turning into physical things.
And I'm not going to ask you to comment on press reports, but I am curious if you think that this is a tension between the Industrial Policy Act, Inflation Reduction Act, Chips, policies designed to get more factories on the ground, and whether there's still things that need to be done on the local side to make it easier to break ground on new construction?
Lael: (24:44)
So two separate really important points that you're making. One is we do need localities to create changes in zoning. And so we have a pro-housing grant program, which is first of its kind, that provides those kinds of incentives to help those communities that do remove barriers to housing production so that they get support for that. And we have a similar kind of program using Department of Transportation transit funding.
On the side of clean energy and chips investments and infrastructure investments, there too a lot of attention has been given to permitting to accelerate the ability to make those investments by having a much more streamlined review at the federal level that brings together all the agencies in a streamlined process rather than going through what in previous administrations was kind of a laborious agency by agency review, that that in many cases took very many years.
So we are looking for kind of game-changing mechanisms to make that permitting process easier while still respecting the really important equities of local stakeholders.
Tracy: (26:08)
So Janet Yellen, now Treasury Secretary, formerly at the Fed of course, very similar to your career history, felt comfortable enough with the economic data last week to basically declare that this looks a lot like a soft landing. After many years, or I should say a couple years, of worrying about the potential for a recession, a hard landing, it feels like we're on the right path. What are you and the Biden administration looking at in terms of benchmarking your success, and how much left there is to do on things like inflation?
Lael: (26:45)
So we are really pleased with how well the economy has performed. An under 4% unemployment rate for 23 months in a row, another 2.7 million jobs created over the last year alone, 14.3 since the beginning of President Biden's time in office and inflation that has come down now to the 2% range core inflation over the last six months.
Most forecasters just said that couldn't be done. I mean, if you look at the forecasters a year ago, there were a lot of recession calls and a lot of those forecasters saying you couldn't get inflation as far down as it is today without seeing a lot of unemployment. That has not happened. And that again is because we were very focused on the supply side of the economy and the president wanted to support the recovery rather than withdraw support.
So in terms of on a go-forward basis, you know, we're going to continue our work because too many things are still too expensive for Americans. We talked a little bit about healthcare. We've got a really robust agenda to bring down prescription drug costs. We talked about housing affordability, that's going to be a major focus of the president in the months ahead.
And we are going to continue calling out corporations who are not passing along cost savings to consumers, as well as those who are pricing in ways that are deceptive and lead to bigger bills at the end of the purchase process than consumers were led to believe. So our work is not done. We are going to continue fighting on behalf of consumers to lower costs.
Joe: (28:44)
Lael Brainard, thank you so much for coming on Odd Lots. Really appreciate your time.
Lael: (28:49)
Appreciate being on the show. Thank you!
Joe: (28:51)
Thank you so much.
Tracy: (28:52)
Joe, I liked your oil production question and the idea that if Trump was still in office and US domestic oil production was at a record, he would be tweeting it nonstop. He'd be tweeting about stocks too.
Joe: (29:17)
He would be tweeting about stocks. Tracy, by the way, is praising me for that oil question because she says I took her joke. So I want, all Odd Lots listeners should know that that was originally Tracy's joke about Trump tweeting the oil production charts. But actually, I mean, like I did find it interesting, here is the number one driver of -- or huge driver of headline disinflation -- one of the most salient prices.
But it's interesting that, you know, on this idea of like ‘Well, do we want to see even more US oil, US liquids production?’ the inclination was to talk more about the clean energy investments.
Tracy: (29:53)
Yeah, I mean you can see why it might be a sensitive topic for the Biden administration given that their platform, you know, going into the election was very much about clean energy and moving away from oil. But then we saw prices spike and obviously there was pressure from consumers to bring those down again. And so kind of a tightrope there.
The other thing I thought was really interesting was the very, very clear and targeted discussion of companies price gouging. And that seems like such a tricky one to me because again, the American political model or economic model is sort of all about, you know, make as much money as you can as long as it's legal. But that seems to be a point of tension or angst, among the domestic population given what's happened the past couple of years.
And so it's really interesting to me to see how the administration actually goes about targeting that particular behavior. And I guess they can sort of nibble at the edges on things like insulin or junk fees, there are concrete things they can do. But how are you going to tell a big consumer goods company to reduce its profit margins and pass on cost savings to consumers?
Joe: (31:08)
Right. I guess you'd sort of [pursue] the moral persuasion aspect, the tweeting about it. Posting about it. But there aren't a ton of policy levers really that it's clear the administration could take. I mean, going back, I did think it was interesting her answer to your question about why is there so much frustration?
Because we started the conversation talking about, okay, this does look like a very impressive labor market, impressive rebound, disinflation over the last year or so without any weakening of the labor market.
And I think her answer is like, yeah, I mean is was, you know, it was a crazy three or four years between everything really, including the inflation. And so this idea of maybe it just needs to give it time to put some of this in the rear view mirror before [things improve].
And actually just today -- we're recording this on Monday, January 8th, you know, there was a New York Fed survey that seemed to indicate people feeling better about their finances, highest in a couple years. So maybe that's the case, maybe it's just a matter of time and we'll see things like UMich and Consumer Conference Board turn higher
Tracy: (32:14)
Lags in consumer sentiment that seem to be the argument there. Like, long and variable lags in people just taking time to digest all the changes that have happened, which kind of makes some sense. But I still have questions about the role of, I guess, partisanship in some of those surveys.
And, you know, if the economy got even better, which maybe is kind of a tall order after what we've seen, would some of that partisanship start to go away or would there still be a significant chunk of America that always feels angry or always feels that things are heading in the wrong direction?
That's an interesting question to me, but for now, shall we leave it there?
Joe: (32:54)
Let's leave it there.